To follow is an excerpt from the CQ Researcher report "Business Ethics" by Maryann Haggerty on May 6, 2011.

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Among the most frequently cited articles on business ethics is “The Social Responsibility of Business is to Increase Its Profits,” written in 1970 by Nobel Prize-winning economist Milton Friedman, a strong free-market advocate. [Footnote 13]

“In a free-enterprise, private-property system,” Friedman wrote, “a corporate executive is an employee of the owners of a business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.”

In this view, going beyond those basic requirements — for instance, as Friedman wrote, spending more to reduce pollution than “the amount that is in the best interests of the corporation or that is required by law” — amounts to improperly spending money that belongs to the shareholders.

The U.S. concept of free-market capitalism is not, of course, universally accepted. Karl Marx, the intellectual father of communism, saw profit as the result of capitalist exploitation of workers. Socialist and communist systems assert that some or all of business profits rightfully belong to society.

But among those who embrace capitalism, many say ethical obligations go well beyond simply making a profit.

A survey of business executives from around the world by consulting firm McKinsey & Co. found that only a minority wholeheartedly embraced Friedman's view. Sixteen percent of respondents agreed that business should “focus solely on providing the highest possible returns to investors while obeying all laws and regulations.” But 84 percent said the role of large corporations should be to “generate high returns to investors but balance [that] with contributions to the broader public good.” [Footnote 14]

“There's always the prevailing responsibility to make sure that you're creating shareholder value if you're a publicly traded organization, or to be making high-quality products or delivering high-quality services,” says Patricia Harned, president of the Arlington, Va.-based Ethics Resource Center, which regularly convenes ethics experts from business, academia and elsewhere. “But most businesses that have very effective … ethics and compliance programs will also say we have an obligation to not just make money but to make sure that we're doing it with the highest integrity.”

That means, she says, treating employees with respect, supporting customers and clients, not breaking the law or engaging in unethical behavior and “being as transparent as we can be about how we do our business.

“It goes well beyond the minimum standard” of not breaking the law, Harned adds.

One of the most widely taught approaches to business ethics holds that businesses have responsibilities not only to shareholders but also to “stakeholders” — employees, customers, suppliers, the surrounding community and others. “Stakeholder theory is the idea that each one of these groups is important to the success of a business, and figuring out where their interests go in the same direction is what the managerial task and the entrepreneurial task is all about,” said R. Edward Freeman, a professor of business administration at the University of Virginia's Darden School of Business and a pioneer of the stakeholder discipline.

“Stakeholder theory says if you just focus on financiers, you miss what makes capitalism tick,” he said. “What makes capitalism tick is that shareholders and financiers, customers, suppliers, employees, communities can together create something that no one of them can create alone.” [Footnote 15]

Since 2006, all students at the Thunderbird School of Global Management, a respected international business school in Glendale, Ariz., have been invited to voluntarily sign a Professional Oath of Honor. In part, it reads: “I will strive to act with honesty and integrity, I will respect the rights and dignity of all people, I will strive to create sustainable prosperity worldwide, I will oppose all forms of corruption and exploitation, and I will take responsibility for my actions.”

A separate oath promoted to business students worldwide by leaders of Thunderbird and other top schools reads in part: “My purpose is to lead people and manage resources to create value that no single individual can create alone; my decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.” The “Oath Project” is an effort to create a “sort of gold standard” on how professional managers should execute their responsibilities, says Gregory Unruh, director of the Lincoln Center for Ethics in Global Management at Thunderbird.

Aside from being good people, corporate executives should look out for stakeholders — including non-shareholders — because it's good for business, says New York University's Berenbeim. “The sustainability of the business depends on a lot more than your earnings per share,” he says. It “depends on a high level of satisfaction of all the stakeholders.” After all, he says, a business with unhappy customers might not be profitable for long.

Stakeholders can hold businesses accountable in a variety of ways. For instance, the University of Toronto's MacDonald says, “the most straightforward” is with purchasing and investment decisions. Other “mechanisms of civil society,” such as protests and bad publicity on Twitter, also are available, he notes.

Websites set up by customers complaining about companies are ubiquitous, as are government sites where customers can complain. SaferProducts.gov, which went live this spring, lets consumers contribute to a federal government database listing possibly dangerous products. Business groups, including the National Association of Manufacturers, complain that if the site is poorly monitored, it could unfairly damage companies' reputations. [Footnote 16]

Such stakeholder pressure can make a difference, though. MacDonald notes that beginning about 20 years ago, Nike, the athletic-shoe maker, was increasingly criticized for its use of overseas sweatshop labor. It gradually reformed its practices and now is regarded as an industry leader against abusive labor practices.

Freeman acknowledged that his theories and Friedman's may seem opposed, but really aren't. “I actually think if Milton Friedman were alive today …, he would be a stakeholder theorist,” Freeman wrote. “He would understand that the only way to create value for shareholders in today's world is to pay attention to customers, suppliers, employees, communities and shareholders at the same time.

“What Friedman was against was the idea of social responsibility that doesn't have anything to do with business. [Footnote 17] I'm against that too. I think stakeholder theory is a theory about business, but community and civil society is absolutely central to business. We need corporate stakeholder responsibility. If we have that, there's no conflict between shareholders and stakeholders.” [Footnote 18]

The Issues:

Do businesses have ethical obligations beyond what the law and shareholders require?

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